Is 3.2 Credit Cards Per Person Too Many? Online Payment Scene in Japan

Credit card penetration is still very low…

This is a very common phrase that I hear from anyone operating an online business in Southeast Asia. However e-commerce is growing year on year so the gap between online purchase behavior and offline payment method is providing big potential for startups to grow in this online payment sector.

As I briefly introduced some information about e-commerce enablers in my previous post, I would also like to touch upon online payment business in Japan since it is a business strongly related to e-commerce. To give you an image of the landscape in Japan, here is a chaos map made by Empower Shop, an e-commerce consultant company.

Although there are various players competing in each vertical and it is interesting to dig into all of them, I’ll stick to the payment service providers (PSPs) in this post since it is a sector that many e-commerce players are relying on.

84% Credit Card Holders, 3.2 cards/person

According to a survey by JCB, credit card penetration was around 84% in 2015. Since many credit cards provide a loyalty program and there are many cards without annual fee, people hold multiple cards, the average being 3.2 cards per person. I checked my wallet and found 5 credit cards… omg

A lot of Yahoo cards!! Lol

Regarding the market situation, it is easy to imagine that people buying through online are pretty much utilizing credit cards for their online payment method. Other than credit cards below is the survey executed by the ministry to understand online purchase behavior.

Data from Ministry of Internal Affairs and Communications

Although there are tech base payment methods, other than credit cards offline payment still has strong presence. However as I mentioned above, it is essential for e-commerce players to be able to handle credit card payments. For small to medium players, it takes time and effort to have direct connection with each credit card companies so they utilize PSPs to integrate several methods in one go.

Payment Solution Providers in Japan

Players like Rakuten and Yahoo Japan who run a big e-commerce marketplace process payments internally so players who only sell on those platform do not need to rely on PSPs. If players have an independent site, there is a high possibility that those players would need to use the above top players or some other smaller PSPs. Overall the profit margin is not high for this industry since the entry barriers are low and the key success factor is the pricing, meaning that many players will see a drop in their margin as the competition intensifies.

Each company is taking its own strategy to tackle this market so I’ll introduce some top players.

1.Softbank Payment Service. Although it is not focusing only on online payment service, the annual transaction volume that it handles is close to $17Bn. Because it also provides its own countertop terminals, it is able to provide an all in one solution to retailers running both offline and online shops. Moreover it is utilizing the customer base from Softbank to help clients with their marketing.

Screen shot from company page. I’ve translated the words.

2.GMO Payment Gateway. This is one of the company with healthy margin within the industry. Handling approximately $17Bn transaction annually, 70% of the revenue is coming from the online payment service. Not just that it serves 77K+ shops and gets commission based on the GMV but that it also receives a monthly subscription fee for its system usage is the reason for its healthy margin. The revenue break down by business models and its sales transition are shown below. Furthermore, since 2013 the company has been investing to 2C2P, a Thailand PSP, a total of $4.75Mn fund so it is likely that the company will expand to SEA region in the near future.

3.Digital Garage Group. ECONTEXT which provides various payment methods including credit card and convenience store payment through one platform and SBI VERITRANS which provides online payment processing services are both subsidiaries of Digital Garage. Both companies have been aggressive in partnering with large internet companies such as LINE, Recruit and Alipay in order to widen their business coverage within the payment sector. The image of the synergy with LINE is as below. Also through Econtext Asia which is also another DG’s group company once listed on Hong Kong stock exchange around 2012 has been active outside of Japan so it is also involved in the SEA e-commerce scene.

Picture from press release. Econtext allows LINE users to charge money into LINE Pay and Veritrans allows LINE users to pay through LINE Pay. Since LINE is the main communication app in Japan, the companies are intending to enhance the user experience by integrating the payment function into one everyday app.

Lastly, I’ll leave information of few major startups operating in Japan within the payment sector.

  • Paidy: a company which makes online payment possible for users by just asking for their phone number and email address without any prior registration. Offline payment is still strong in Japan so an alternative online method that can attract non credit card users fits this unique market. Raised a $15 mn Series B funding round led by SBI Holdings and Eight Roads Ventures in July 2016.
  • Base: an instant e-commerce enabler and also a payment platform provider. The company started off as a Shopify business where consumers and merchants can set up their online shops just in few minutes. Now it is also providing a payment service that allows engineers to easily add credit card option to their web service or e-commerce site. Raised $14.4 mn from SBI Investment, SMBC Venture Capital and Suneight Investment in Oct 2016.
  • WebPay: Credit card payment service for engineers to integrate settlement function through a simple API. Acquired by LINE Pay in 2015.